On a morning in 2019, Kwame Asante arrived at his local bank branch in Accra, only to find it closed and a notice from the Bank of Ghana. Kwame’s bank (along with several other financial institutions) had become insolvent due to financial regulatory requirements. Just like thousands of other Ghanaians, he was suddenly confronted with the unexpected dilemma of being cut off from all of his life savings and wondering if he would be able to recover his money.
“I had saved for my daughter’s education for seven years,” Kwame recalled. “And, it looked like all of it was gone overnight.”
Kwame’s situation exemplifies the human aspect of the many vulnerabilities to the financial system that has characterized Ghana’s economy for the last decade. From 2017 to 2019, Ghana experienced one of the more disruptive financial sector crises, where nine banks, 347 microfinance institutions, and 39 microcredit companies closed (Bank of Ghana, 2020). The Ghanaian cleanup cost us almost GH₵21 billion (US$3.6 billion), which is close to 5 percent of GDP and reduced public confidence in financial institutions.
As Ghana tries to rebuild its financial system, not only in light of the domestic crisis but also the global resurgence of volatility and uncertainty in the post-COVID-19 pandemic, it is now evident risks and regulatory compliance cannot be regarded as operational matters and administrative functions; they must be viewed as the readiness we will require for sustainable and robust financial future.
This article will highlight the recent evolution of the financial landscape in Ghana while demonstrating the importance of risk management functions and regulatory compliance systems in developing a financially safe, effective, and resilient sector that responds to the developmental priorities of Ghana and protects its people.
The Ghanaian Financial System: Recent Dilemmas and Progress The Banking Sector Crisis and Aftermath
The banking sector crisis between 2017 and 2019, was a watershed moment in Ghana’s financial system. In a comprehensive review, the Bank of Ghana determined the systemic problems consisted of what it termed, deficient minimum capital, a plethora of non-performing loans, and a general element of failure not just on
governance but regulatory compliance as well (Dzawu, 2019). The Bank of Ghana undertook a series of interventions to address the governance issues outlined above and to strengthen systemic vulnerabilities to build stronger stability guarantees.
Dr. Ernest Addison, Governor of the Bank of Ghana, defended the Bank’s actions by saying, “the reforms were necessary to protect depositors and to an extent for the financial sector to provide a certain degree of known stability and reliability for growing Ghana’s economic transformation” (Bank of Ghana, 2022).
Reforms included raising commercial banks’ minimum capital from GH₵120 million to GH₵400 million, further governance reforms, and the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), which has a more broad-based definition of the regulatory framework for financial institutions (Quartey & Agyemang, 2021).
COVID-19 and Economic Pressures
After the challenge of stabilisation following the reform process, the ramifications of COVID-19 were vociferous to consider. The economic activity slow down from measures that were instituted to support the progress of the pandemic negatively affected loan performance and increased liquidity exposures for institutions (IMF, 2021).
Ghana’s experience further morphed with the devaluation of the cedi, inflationary pressure increased significantly, and government national debt levels ballooned. The ratio of the debt to GDP ratio exceeded 90% at the end of 2022. Consequently, the government sought assistance from the International Monetary Fund (IMF, 2023).
Recent Recovery Activities
Since 2023, Ghana has been undertaking an economic structural adjustment programme coordinated by the IMF, which provided an Extended Credit Facility of $3 billion. The proposed measures of the programme envisioned strengthening the financial sector through reforms to address organised and enhanced supervision of banks, non-bank financial institutions, improvement in the framework for resolving failed institutions and credit risk management practices (Government of Ghana 2023).
The recovery programme has started to achieve positive outcomes. For example, in the Bank of Ghana’s Financial Stability Review (2024), the review cited several improvements in regard to:
- CAPITAL ADEQUACY RATIO: rose to an average of 19.8% (more than the regulatory minimum of 13%)
- LIQUIDITY RATIO: improved significantly to 63.2% (more than the required minimum of 25%)
- NON-PERFORMING LOANS RATIO: declined to 14.3%, from a peak of 17.9% in 2021
- PROFITABILITY: trends were positive as the return on equity of 16.4% was reported (Bank of Ghana, 2024).
Risk Management: Building Blocks for Financial Resilience Credit Risk Management
Credit risk (the risk of loss due to borrowing not being repaid) is still one of the biggest risk challenges facing Ghanaian financial institutions. NPLs are at high levels and can affect the overall lending capacity, or increase the cost of credit.
Research undertaken by Boateng and Amponsah (2022) suggested that to achieve significantly lower NPLs during 2020-2022, banks were most likely to have used more sophisticated credit risk measures compared to banks that primarily applied a traditional assessment approach.
Ghanaian progressive banks have been applying credit scoring models which take into account wider contextual data points such as mobile money transaction history and utility bill payments to assess creditworthiness particularly amongst the previously unbanked group (Fintech Ghana Association, 2023).
Liquidity Risk Management
Liquidity management increased interest in risk management after it was exposed that some financial institutions suffered solvency risks due to tensions caused by mismatches between short-term liabilities and longer-term assets. The Bank of Ghana (BoG) revised its approach to liquidity management in 2022 and subsequently required financial institutions to maintain liquidity coverage ratios that reflect a more comprehensive analysis of liquidity risk and undertake stress tests on a periodic basis1.
According to Mensah and Owusu-Antwi (2023); financial institutions that adopted advanced liquidity forecasting models and maintain funding from diverse sources were positioned to absorb adverse shocks in 2020-2023 that meant they were less impacted by market and liquidity stressors.
Operational Risk Management
Operational incidents, such as fraud, technology failures and process errors, have resulted in large losses in Ghana’s financial sector. A report from the Ghana Association of Bankers (2022) estimated the cost of operational risk events to Ghanaian banks as GH₵450m in 2021.
Financial institutions are increasingly adopting integrated operational risk management frameworks that blend traditional controls in combination with technology solutions:
- Automated fraud detection systems with machine learning algorithms
- Internal control with better segregation of duties
- Better disaster recovery and business continuity management
- Employee training programs focusing on risk awareness
The results thus far appear to be encouraging. Banks that had a mature operational risk management framework reported 43% reductions in the number of significant operational loss events in 2023 in comparison to 2021 (Ghana Association of Bankers, 2024).
Cyber Risk Management
Ghana’s financial system is rapidly digitising, and cybersecurity risk is now receiving much stronger attention as a risk management issue. According to the National Cyber Security Centre, between 2020 and 2023, there was a 152% increase in cyber incidents targeting Ghana’s financial sector (National Cyber Security Centre, 2024).
To respond to increased levels of cyber incidents, the Bank of Ghana (BoG) issued the Cyber and Information Security Directive in 2021 to set minimum standards for cyber security in all financial institutions. The directive requires that all financial institutions conduct regular vulnerability assessments, penetration testing, and require larger financial institutions to establish security operations centres.
Financial institutions employing an appropriate cyber security framework covering systems for advanced threat detection, employee awareness training, and secure development methods have shown much better rates of containment and mitigation to cyber threats (Cyber Security Authority Ghana, 2023).
Regulatory Compliance- The bedrock of continuity Ghana’s Evolution in Financial Regulation
Regulatory compliance has evolved since 2019. Here are examples of where we have come from as a financial regulatory space in Ghana:
- Consolidation of Banking Supervision: BoG have transitioned towards an integrated form of banking supervision and have combined on-site examinations with continuous off-site monitoring and risk- based supervision (Bank of Ghana, 2021).
- Additional Money Laundering \ Counter Financing of Terrorism (AML/CFT): Ghana was removed from the Financial Action Task Force (FATF) “grey list” in 2020 and authorities have continued to strengthen the anti money laundering and counter financing of terrorism frameworks. The Anti Money Laundering Act (Amendment) Act, 2020 (Act 1044) entails more stringent requirements for customer due diligence and suspicious transaction reporting (Financial Intelligence Centre Ghana, 2021).
- Market Conduct: Following the asset management industry crisis, the Securities and Exchange Commission (SEC) put regulations in place focusing on market conduct and consumer protection. Examples: the Securities Industry (Conduct of Business) Rules, 2020, sets clearer standards for investment advisers and fund managers (Securities and Exchange Commission Ghana, 2022).
- Payment Systems: The Payment Systems and Services Act, 2019 (Act 987) provides comprehensive regulation of the rapidly developing digital payments industry in Ghana, which has gone beyond mobile money operators and is now including payment service providers (Ministry of Finance, 2022).
Compliance Management Systems
In exposing compliance management systems and functions in Ghana’s dynamic regulatory landscape, compliance management systems have become more critical for financial institutions. According to Kwarteng and Aveh (2021) report, banks that were considered to have developed mature compliance functions (having appropriate resources, clear reporting lines, and proper segmentation mechanisms) were 60% less likely to have any regulatory sanctions between 2019 to 2021.
Moving on to the next aspect, Ghanaian institutional financial institutions have progressed beyond perceiving compliance as a cost center by integrating compliance into their strategic management decision-making process. This is often described as “compliance by design”, as financial institutions have considered
regulatory requirements at the beginning of their products, services and business processes and not simply as an afterthought (Ghana Banking Association, 2023).
Regulatory Technology (RegTech)
The adoption of regulatory technology solutions is also starting to pick up within Ghanaian Financial institutions. These regulatory technology solutions include automated regulatory reporting systems, artificial intelligence tools for transaction monitoring, and digital know-your-customer verification of customers which allow for less costly and more efficient ways of managing compliance.
In a survey conducted by Ghana FinTech Association (2023), the financial institutions that adopted RegTech solutions reported an average reduction of 23% in compliance costs, while improving accuracy, and timeliness of regulatory reporting.
The Bank of Ghana also contributed to this trend by establishing the Regulatory Sandbox, in 2021. There are many advantages to the bank’s regulatory sandbox including, to test products and services to new consumers in a controlled environment, including RegTech Solutions (Bank of Ghana, 2022).
Building a Culture of Risk Management and Compliance Leadership and Governance
Building a resilient financial system ultimately comes down to establishing the right culture within financial institutions. Evidence in the literature suggests that risk management and compliance must start at the top.
A study of banks in a developing economy, specifically Ghana, conducted by Osei and Agyapong (2022) found banks whose boards of directors actively engaged in risk oversight, demonstrated this engagement with separate risk committees who assessed the risk assessments regularly and had appropriate risk management expertise, performed far better on prudential indicators during the study period of 2019-2023.
In 2022 the Bank of Ghana’s Corporate Governance Directives for Banks has required the board to delineate responsibilities for risk management and compliance, separate risk committees, and maintain complaints about the fitness and propriety of their directors (Bank of Ghana, 2022).
Staff Development and Training
Building capacity for humans will always be a challenge. The Ghana Banking College in its 2023 Financial Sector Skills Survey, still reports skills gaps in very trans-localized areas, including:
- Complex risk modelling and quantitative analysis;
- Technology risk management;
- Environmental, Social and Governance risk assessments;
- Integrated compliance management.
Although many leading institutions have turned will to training opportunities and partnerships with international institutions to develop local talent some of the larger banks constructed risk-management academies, with well-defined pathways to facilitate the career development of risk professionals (Ghana Banking College, 2023).
Risk and Compliance Technology Infrastructure
The technology risks and compliance infrastructure demands hefty investment. Financial institutions must be aware of complex operating conditions that contrast with advanced systems demanded.
According to a survey conducted by KPMG Ghana (2023), financial institutions are investing in:
- Integrated risk management platforms to provide a holistic perspective on risks across an organization
- Automated regulatory reporting systems enabling institutions to reduce manual processes and error rates
- Advanced analytics for identifying emerging risks and compliance issues
- Secure and cloud-based solutions that scale up and down with business needs and costs
Although this type of investment is heavy, it is viewed as necessary, if not mandatory, among financial institutions that are commendably focused on sustainability in the medium-long term (KPMG Ghana, 2023).
Moving forward – Emerging Trends and Opportunities Climate Risk Management
Climate risk creates both physical and transition risks to the financial system in Ghana. Physical risks comprise the destruction of collateral assets due to extreme weather, while transition risks arise from policy changes, innovation, and shifting market conditions related to transitioning to the low-carbon economy.
The Bank of Ghana collaborated with the Ghana Sustainable Banking Principles Committee to develop climate risk management guidelines in 2023, encouraging financial institutions to assess considerations related to climate risks in their risk management framework, and appropriate metrics and targets (Bank of Ghana, 2023).
Some early movers are already implementing more sophisticated analyses of climate-related financial risks by undertaking scenario analyses and stress-testing loan portfolios under different climate pathways (Ghana Sustainable Finance Initiative, 2024).
Digital Transformation and Emerging Risks
Ghana’s rapid digital transformation creates challenges and opportunities for the financial system. Digital financial services have increased access to services and significantly influenced financial inclusion, where mobile money accounts outstrip traditional bank accounts by a ratio of three (Ghana Statistical Service, 2023).
However, rapid digital transformation generates novel risks and induces innovation strategies for their management. The Bank of Ghana established the FinTech and Innovation Office in 2020 to work towards a regulatory environment that supports innovation while maintaining system stability.
The Bank of Ghana’s position comprises the following areas of focus:
- Development of appropriate regulations for emerging business models such as digital banks and embedded finance;
- Establishment of frameworks for the management of the risks associated with financial services related to artificial intelligence and machine learning;
- Development of standards for open banking; API-based financial services; and
- Improvement of consumer protection in digital financial services (Bank of Ghana, 2024).
Regional Integration and Cross-Border Risk Management
Financial institutions in Ghana are expanding their operations across West Africa, simultaneously creating new opportunities and introducing cross-border risks. As part of the Financial Integration in the ECOWAS region, significant reform was introduced with the Pan-African Payment and Settlement System (PAPSS), which enabled communication and greater integration across platforms and systems. The need for enhanced
coordination in terms of managing risks regulatory oversight is being exposed by ongoing opportunities for enhanced collaboration on risk management and regulation.
The Bank of Ghana has engaged with regional supervisors’ colleges and information sharing arrangements with other regulatory authorities to improve cross-border financial oversight (West African Monetary Institute, 2023).
Conclusion
Ghana’s journey to a resilient financial system is ongoing. While there has been significant development in risk management and regulatory frameworks since the banking crisis, challenges remain. The external context of Ghana’s financial system is also an increasingly complex environment, and for example, whether technology is transforming our understanding and abilities, whether climate change is changing the rules of engagement, whether the rest of the world is changing to and through Ghana’s developing economy.
For Kwame Asante and millions of Ghanaians, the stakes are as high as they could be. When we think of risk management and compliance with regulation, we can’t separate out from the fact that these are not just technical issues for financial professionals, these are layers of protection for the financial wellbeing of ordinary citizens.
As Dr. Maxwell Opoku-Afari, First Deputy Governor of the Bank of Ghana suggested, “Building a truly resilient financial system in the world we live in today requires collaboration, active engagement, and communication… It’s about growing a culture of prudent risk management – a little hard to describe, but almost a second nature.” (Bank of Ghana, 2024).
If these transformations are created, Ghana and its financial system could remain a bastion for economic development, and not a vulnerability, if they continue to build risk management capacity, regulatory frameworks, and a compliance culture against the discomfort of lessons learned and examples of emerging best practices and continued technology use.
In the end Kwame had a positive outcome. He recovered 95% of his deposits in the failed bank with the Government’s depositor protection program, all within the year. And although more careful he continued to use the financial system.
He said “I’m being more careful now – that is, I’m paying attention and checking out banks before I give them my money,”. “But though, I also think that, without any financial system working, we can’t do anything anyway, as a Nation. We just definitely have to get this right’.
As evidenced throughout Ghana’s journey, getting it right includes an ongoing commitment to good risk management and compliance with regulation as the foundations for resilience in the financial system.
References
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Bank of Ghana. (2022). Liquidity Management Framework for Banks. Accra: Bank of Ghana.
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Bank of Ghana. (2022). Annual Report 2021. Accra: Bank of Ghana.
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Kwarteng, A., & Aveh, F. (2021). Compliance management maturity in Ghanaian financial institutions. African Journal of Compliance Studies, 7(1), 23-42.
Mensah, J., & Owusu-Antwi, G. (2023). Liquidity management practices and financial stability: Evidence from Ghana. International Journal of Financial Studies, 11(2), 112-131.
Ministry of Finance. (2022). Payment Systems Development Strategy 2022-2027. Accra: Ministry of Finance.
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Osei, K., & Agyapong, D. (2022). Board risk oversight and bank performance in Ghana. Corporate Governance: An International Review, 30(3), 287-306.
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Author: Martinson Kwadjo Gyeke, Alumnus of David Eccles school of Business; University of University. Former Financial Services Representative of Bank of America
